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Analyst report
Should we fear a US recession?
January 14, 2008
Brendon Lau, ShareAnalysis
Fear of a US recession is a major driving theme for our equity market, and this fear will continue to be featured heavily for the next few months. However, investors should stop panicking as it may not matter much whether the US slips into a recession or not.
This may sound like heresy, especially after the drubbing Wall Street received on Friday as shockingly poor jobs data heightened fears of a US recession. Rest assured that our counter-intuitive reassurance is based on more than blind faith.
In fact, there are two primary reasons why we think investors should stop focusing solely on the "R" word. For one, investors by and large are expecting a mild US recession in early 2008. Confirmation of this will not catch anyone by surprise and markets are unlikely to make a significant move unless the recession is worst than expected.
Could there be a deeper and longer lasting recession lurking round the corner then?
It is possible, just not very probable. After all, there is still great debate as to whether the US would slip into a recession in the first place, and even amongst the bears, most are expecting a fairly mild contraction that would last only a quarter or two.
On that last note lies the second reason why we refuse to let the "R" word keep us awake at night. By the time we get official confirmation that the US is in a recession, the world's largest economy would probably be already climbing out of the economic abyss. The thing about recessions is that these are largely backward-looking events, while stocks are priced for the future.
Technically, the definition of a recession is "two or more consecutive quarters of negative economic growth". Investors will only know if the US is in a recession in the following quarter, after the release of the GDP data. This means you will only know if the US has hit a recession somewhere in 3Q08, and since a US recession is not expected to last more than two quarters, few equity investors would care by then.
This is one reason why a number of high-profile equities strategists in the US have been saying that now is the time to buy US stocks. Their optimism stems from an expected pick-up in US economic activity in 2H08, thanks largely to a vigilant US Federal Reserve (that is expected to cut interest rates further to starve off a recession) and a weak US dollar that could boost manufacturing exports.
Before you get too relaxed though, Australian stocks are likely to go through another toe-curling roller coaster ride in over the next few months. If you like to have something to worry about, try rising global inflation and US$100 plus per barrel crude oil. These factors are arguably bigger threats to our economy.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
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Stocks: Fund manager stock tip: ABB Grain
Resident Trader: Book Review: Supercharge your Trading with CFDs
Stocks: Stock of the week – Mermaid Marine
Analysis: Should we fear a US recession?
Commodities: As the bear resurfaces in the US, gold thrives
Economics: Slip sliding summer
CFDs: Top 10 CFD Stocks
Markets: Wall St falls sharply
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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